July: Tricky by Anyone's Standards

Editors note – we would like to welcome Meredith Kelley Zidek as a new contributor to the CBOE Options Hub. Meredith is a private investor whose interests include equities, options, and commodities. She began trading equities in 2007, and since then has cultivated interests in corn, energy, and most recently, index and equity options. Almost all of her trading, which can be seen on grapestrades.blogspot.com, involves short options on volatility-related instruments. She studies the movements of world indexes and analyzes options chains to determine advantageous timing for short-selling of contracts. Meredith holds a B.A. from Loyola University, and resides in Hunt Valley, Maryland.

As if the first half of July didn't provide enough adventure, I set out to bring in a few more dollars during the second half. As usual, I survived some scrapes and scares and ended up with just that: A few more dollars.

Set forth below is my ill-timed scheme to capitalize on what I believed would be persistent volatility aftershocks for the remainder of July. I wrote calls on SVXY at the 94 strike for the July 31st expiration, and the very next day - well, you can see what happened. Two days later, still hoping I'd hang in there long enough to get the glory, I reinforced the same strategical position (read: I made things potentially worse for myself) by writing UVXY puts at the 25 strike also for the July 31st expiration.

Now, take a look at the 14-day charts above to see where those securities ended up at month-end (the expiration date of my contracts.) I would have been fine holding those through the end of the month, and would have made virtually all of the $946.50 I set out to make. But in a fit of disgust on July 23rd, having already viewed a lot of red ink and pondered rolling schemes until my eyes were ready to fall out, I closed those positions, loathe though I am to book a loss - ever. (And you will see by the end of this post that it was the only loss booked during the entire month.) See below for the result: Profit on one, loss on the other, for a net loss of a few hundred dollars. As already mentioned, now I have the benefit of hindsight to see that I could have held onto them, but I consider my fundamental mistake - if I made one - to be writing those options too close to the stock price at the time and too far away (two weeks is a long time with anything trading that close to strike unless you want to characterize it as "level-calling," or reckless speculating, which I am not casting judgment upon. I probably do it a lot.)

After seething for just about exactly one day (and declaring publicly on twitter that I would get "trader's revenge"), I gathered my wits and focused in on SVXY, and opened a short strangle. This time I set out to be prudently conservative. See the 7-day chart below, showing my exit point on July 23rd from the above mess and the points at which I opened new positions on July 24th. I wrote puts on SVXY at the 81 strike for the July 31st expiration, and late in the day (that adventure detailed in the previous blog post) wrote calls on the same security, same expiration, at the 98 strike.

With only a week to go, premiums were low, but when you want to scrape a little return out of the market in just one week, you work with what inventory is still in stock. With strikes that far from current price (SVXY was about $90 on that day, but with a big range of $89.03-94.36, which is difficult for even seasoned traders to get solid footing on when you think about it), there's probably something to be had at every strike within a crazy person's idea of reason. I found those crazy offerings and put them right into my account. (55 cents on the 81 puts and 35 cents on the 98 calls.)

Above, see the outcome. On Monday, July 27th (the next trading day after opening the position), I could not resist the 5-cent buyback available on the 98 calls. What happened is that SVXY plunged so much during a weekend gap between Friday the 24th and Monday the 27th - down to 83.58, (which, by the way, made my short puts look temporarily ugly) - that no one envisioned SVXY up near 98 anytime soon, so premium dried up instantly. I closed the calls out, if for no other reason than to free up margin to write different calls later in the week (although I never did.) As for the 81 puts, they courteously and conveniently expired worthless.

So, at mid-July, I set out to make $947; failed by losing $229 instead; vowed that I'd make that back or better; made $640 on the succeeding strangle, for a net of $411 on my end-of-July money-grab. Which is not what I'd normally consider exemplary, but added together with accomplishments earlier in the month, makes for a month I will not complain about! (total trades for the month below)

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